800.51 W 89/263a

The Secretary of State to Diplomatic and Consular Officers

Diplomatic Serial No. 580

Sirs: Referring to Diplomatic Serial No. 557, dated January 8, 1927, entitled “Funding of Debts of Allied Countries”, and Diplomatic Serial No. 563, dated January 20, 1927, entitled “Statement of Members of the Faculty of Columbia University Proposing an International Conference on War Debts”,1 the Department transmits herewith for your information:

Statement of certain Princeton professors regarding war debts, March 9, 1927;
Letter of Secretary Mellon to Dr. John Grier Hibben of Princeton University, March 15, 1927.

I am [etc.]

For the Secretary of State:
Leland Harrison
[Enclosure 1]

Statement of Certain Princeton Professors Regarding War Debts, March 9, 1927

A statement made public by President John Grier Hibben is signed by 116 members of the Princeton Faculty and reads:

“We, the undersigned, members of the Faculty of Princeton University, heartily endorse the desire, expressed by the faculty of Political Science of Columbia University, for a reconsideration of the settlement of the allied debts.”

President Hibben’s statement follows:

“The signatures of the 116 members of the Princeton Faculty constitute one more indication, in a lengthening series, that the enlightened opinion of the country calls for a revision of the debt settlement with our former allies. However well intentioned may have been the motives of our Representatives who approved the terms [Page 732] of these settlements, and however lenient these terms may be represented to be by those who wish to insist on our generosity, there is a growing recognition that the settlements so far effected do not meet the actual situation. Even granting the capacity of our debtors to fulfill our stipulations, which is now openly questioned, we do not desire to impose tremendous burdens of taxation for the next two generations on friendly countries who are struggling to regain their strength at the very time when we are amassing a national fortune. To urge our Government’s obligation to its citizen bondholders and taxpayers is to evade the real issue, which does not concern the relation of the Government to the people, but our national policy toward certain other States. To divorce the financial provisions of the loans from the moral situation in which they were asked for and given is to invent an unreal economic abstraction. Against the contention that this question should not be raised until all our debtors have come to book there is a ready rejoinder that it would be wiser to adopt a policy which would facilitate agreements with the remaining parties and then revise previous agreements. Finally, there is good reason to believe that in economics, as well as in morals, altruism is indistinguishable from true self-interest.”

[Enclosure 2]

Press Release Issued by the Treasury Department, March 17, 1927

Letter of Secretary Mellon to Dr. John Grier Hibben of Princeton University

My Dear President Hibben: Your statement and that signed by 116 members of the Princeton University faculty endorsing the statement issued by the faculty of political science at Columbia, and urging the reconsideration and revision of the debt settlements with our former associates in the war, have come to my attention. I recognize, of course, the propriety of a frank expression of opinion on important public questions on the part of those in responsible positions, but I am somewhat surprised that before giving the public the benefits of their conclusions neither the gentlemen of the faculty of Columbia University nor those of the faculty of Princeton University saw fit to make a thorough and first-hand investigation of data available at the Treasury or sought by personal interview to ascertain the views of the American officials who negotiated the settlements. The training of these gentlemen, their standing as economists, historians and teachers of government, would have led me to believe that they would have conceived it to be their first duty to present a dispassionate analysis of the facts based on original study rather than to submit their conclusions unsupported by facts.

Moreover, it would not have been amiss for you and your associates to have taken into consideration that one of these agreements has not [Page 733] been ratified and that the inevitable effect of such a pronouncement would be to encourage and strengthen the opposition in foreign countries to such ratification, an encouragement entirely unwarranted by the circumstances in view of the fact that the American people, expressing themselves through their chosen representatives in the House of Representatives, have approved of this agreement and that the debate, when the measure was before the House for consideration, indicated that an overwhelming majority of the Representatives were opposed to more lenient terms. It is highly probable that such expressions of opinion, far from making the adjustment of these outstanding obligations easier, will simply increase the difficulties of obtaining a better understanding and a ratification of the agreement.

In this connection I cannot refrain from pointing out in answer to the plea urging the re-opening of all debt settlements, that it is not so long since that all of our soundest economists claimed and rightly claimed that the one prerequisite to the restoration of economic prosperity in the world was an early settlement of these debts between governments. The adoption of the Dawes Plan, the ratification of the various agreements between governments providing for payment of this vast unfunded obligation, have, in the course of the last few years, contributed mightily to the progress that has been accomplished. Re-opening all of the settlements would, in my judgment, be a step backward and not forward and one calculated to produce discord and confusion rather than to contribute to the economic stability and orderly betterment of world prosperity.

In your statement you say that to divorce the financial provisions of the loans from the moral situation in which they were asked for and given is to invent an unreal economic abstraction. By this I take it you mean to endorse the argument advanced by the Columbia faculty that our war advances to our associates were not at the time they were made regarded as business transactions but rather as joint contributions to a common cause. Admitting, of course, that the Congressional debates indicate clearly that the Congress was quite willing to loan this money, even on the assumption that there was a considerable element of risk in so far as ultimate recovery was concerned, nevertheless the record indicates beyond dispute that these were loans and not contributions and though not in form in actual effect loans from individual American citizens rather than contributions from the Treasury of the United States. The act providing for these loans authorized the United States Government to sell Liberty bonds to its own people and to invest the proceeds of the sale in the bonds of these foreign governments, the latter bonds to bear the same interest as the Liberty bonds sold and to have the same maturities. What we allowed our associates to do, in effect, was to borrow money in our [Page 734] investment market, but since their credit was not as good as ours, to borrow on the credit of the United States rather than on their own. Looking at the substance rather than the form of the transaction, the situation was no different than if they had actually sold their own bonds in the American market and our government had endorsed them. Had this course been followed would anyone contend that the sums advanced were intended as contributions to a joint enterprise rather than loans expected to be repaid?

As a corollary to this first proposition it is urged that if these advances were not to be considered contributions as an original measure they ought now to be so considered because our associates were not fighting their own battle alone but ours as well, and that for some months we were unable to put many troops into line. I am not going to attempt a discussion of the military contribution made by the United States to the winning of the war other than to remark that when the crucial period was reached in the Spring and Summer of 1918 our troops were there. I recognize that there is merit in the contention that the associated governments might well have joined in pooling their resources in a common cause and that even now an argument can be made in favor of writing off debts incurred after our entry into the war to the extent that they were incurred for contributions to a common cause, but, and this is an all-important reservation, there is merit to such an argument only if the proposed adjustment is to be a mutual one and is to be applied to all on a strictly equal basis. This factor, however, is one that seems to have been completely overlooked by the faculties of Columbia and Princeton Universities and by other advocates of debt cancellation urging the common cause contribution argument.

Early in the war in order to minimize the dislocation of exchanges and for sound economic reasons the general principle was established that goods and services purchased by one ally in the country of another ally should be financed by the latter. That is to say, that if France purchased supplies and services in England the British government would furnish the pounds with which to buy them and, vice versa, when Great Britain bought goods and services in France the French government would undertake to furnish the francs. As to whether in the latter case the francs were furnished on credit or for cash I do not know, but in the former case the pounds were furnished on credit. When we came into the war we readily agreed to apply this sound principle to our transactions with our associates. That is to say, we agreed to furnish them the dollars with which all their purchases in the United States should be consummated and what is more, we agreed to lend them those dollars. This was the origin of these debts. But here is the fact that is not mentioned and [Page 735] which you gentlemen have apparently overlooked. We purchased supplies and services from France and the British Empire by hundreds of millions. They had to be paid for in francs and in pounds. We did not get those francs and pounds on credit—we paid cash for them, except possibly in a few comparatively minor instances. In other words, we paid cash for the goods and services necessary to enable us to make our joint contribution to the common cause. Our associates got the goods and services purchased in this country necessary to enable them to make that part of their joint contribution on credit. Here is the fundamental reason which explains why we ended the war with every one owing us and our owing no one. We are now urged to cancel these debts because it is alleged that they were incurred in a common cause, but neither abroad nor in this country has it been suggested that if this is to be done we are to be reimbursed the dollars actually expended by us in France and Great Britain so that the goods and services they sold us might constitute their contribution to the common cause.

In this connection, one other fact may well be called to your attention. Among the purposes for which we made dollar advances was that of maintaining the franc and pound at somewhere near their normal values. In other words, we loaned our associates the dollars with which to purchase bills on London and Paris and so permit them to peg the exchanges. When we were obliged to purchase francs and sterling for our own uses in the Paris and London markets, we did so at the artificial prices maintained by the use of the very funds we had loaned. I have no desire to emphasize this point. I mention it, together with the situation above described, as factors which had to be considered by those charged with the responsibility of negotiating the settlements on behalf of the American Government, and which, with other important ones, could have been readily ascertained by those undertaking to advise our people had they availed themselves of the opportunity which would have been gladly afforded them to ascertain all of the facts.

Before leaving the question of the purposes for which the debts were incurred, may I remind you that I have already had occasion to point out that the present value of these debt settlements at 5%, a rate less than most of the debtor nations now have to pay for money, is, except in the case of Great Britain, either less than or approximately the same as the amounts borrowed after the Armistice. France’s after-war indebtedness with interest amounts to $1,655,000,000; the Mellon-Berenger settlement2 has a present value of $1,680,000,000. Belgium’s post-Armistice borrowings with interest were $258,000,000, and the [Page 736] present value of the settlement3 is $192,000,000. The post-Armistice indebtedness of Italy with interest is $800,000,000, and the present value of its debt settlement4 is $426,000,000. The principal of Serbia’s post-Armistice indebtedness aggregates $16, 175,000, and the present value of its debt settlement5 is $15,919,000. The loans to Finland, Esthonia, Latvia, Lithuania, Poland, Czechoslovakia, Hungary, Austria, and Rumania were all made after the Armistice.

The Columbia professors criticized capacity to pay as a formula difficult, if not impossible, of just application, a criticism I understand you endorse. But no other formula is suggested. It is obvious that in the settlement of these huge debts, the burden of which must be borne either by foreign taxpayers or by our own, it was essential that the negotiations must be based on some guiding principle if justice was to be done between all parties; that is to say, not only as between creditor and debtor, but as between debtors. Frankly, I know of no fairer formula than that of capacity to pay generously applied. To ask a debtornation to pay substantially less than it is able to without undue burden on its people is to do an injustice to our own taxpayers; while to ask a foreign debtor to pay more than its capacity, is to be guilty of an act of injustice such as I can assure you cannot be charged against us. Apparently you would have all debtors treated on an equality. Does this mean that the Italian settlement should be raised to a point where it will correspond to the British, which, of course, would impose a burden impossible of performance by Italy, or do you propose that the British be reduced to 50% and the Italian raised to 50%, which would make an easy settlement for Great Britain and a still impossible settlement for Italy? Or do you propose that the British settlement shall be brought down to the Italian 26%, thus imposing no real burden on England at all?

You say that “We do not desire to impose tremendous burdens of taxation for the next two generations on friendly countries”. Are you quite sure that this is an accurate statement of the facts? In estimating the debtor’s capacity to pay without inflicting such a sacrifice as would cause a lowering of its standard of living, only incidental consideration was given to the reparation payments to be received by the debtor countries from Germany. Now, the fact is that all of our principal debtors are already receiving from Germany more than enough to pay their debts to the United States; and France and Italy, with the exception of this year in the case of the latter, are receiving from the same source more than enough to pay their debts to Great Britain also.

[Page 737]

France, in the year 1926–27, will receive from Germany approximately $176,000,000. Under the agreements with Great Britain and with the United States, France will pay $30,000,000 to us and some $71,000,000 to Great Britain, leaving to France a balance of $75,000,000. In 1927-1928, that balance will grow to $108,000,000. In 1928-1929, in spite of the fact that the payment to Great Britain rises to $85,000,000, the balance available to France will amount that year to $186,000,000; and, in 1930, after meeting her obligations to the United States and to Great Britain, there will be a balance from reparation payments of $237,000,000. Italy is paying us this year $5,000,000 and to Great Britain $19,000,000. They will receive from Germany $22,000,000, which is just $2,000,000 less than is necessary to meet their obligations to Great Britain and the United States. But, in 1929, German reparations will have risen to $45,000,000, leaving to Italy a balance, after her payments as debtor, of $21,000,000. And even in 1936, when her payments to us will amount to $16,000,000, and to Great Britain approximately $20,000,000, those two amounts will still fall short by $15,000,000 of the sums received from Germany.

Belgium this year will receive from Germany $16,000,000 more than she will pay to other countries; in 1927-1928, $18,000,000 more; in 1929-1930, $27,000,000 more. Jugo Slavia will receive this year 11 million dollars more than they will have to pay, and next year 13 million dollars more. All of the other powers that owe us money will, in the aggregate, receive this year $3,000,000 less than they have to pay, but by 1929 will be receiving $3,000,000 more than they have to pay.

Finally, we come to Great Britain. Under the agreements with France, Great Britain will receive from France approximately $71,000,000 this year; from Italy approximately $19,000,000; from Germany approximately $72,000,000, and will pay us $160,000,000. Or, in other words, Great Britain will receive this year from her debtors $2,000,000 more than she pays us. Next year Great Britain will receive from France $69,000,000; from Italy, $19,000,000; from Germany, $87,000,000; or a total of $175,000,000. Great Britain will pay us $160,000,000, leaving a balance of $15,000,000. In 1928–1929, Great Britain will receive from France $85,000,000; from Italy, $19,000,000; from Germany $127,000,000; or a total of $231,000,000. Great Britain will pay us $161,000,000, making a credit balance of $70,000,000. It is true that in the past two years Great Britain has received about $100,000,000 from Germany, France and Italy less than she has paid to the United States, but it is equally true that from this year on Great Britain every year will receive from her debtors a substantial amount more than she will pay to us, so that her American payments will not constitute a drain upon her own economic resources.

[Page 738]

It is true that Great Britain has agreed not to accept more from her debtors than the sums which when added to reparation payments will equal those which she pays the United States. But even taking this into consideration, it is obvious that your statement that the debt agreements which we have made impose a tremendous burden of taxation for the next two generations on friendly countries, is not accurate, since the sums paid us will not come from taxation, but will be more than met by the payments to be exacted from Germany.

It must also be obvious that if the amounts to be paid by all our debtors are to be reduced and a corresponding reduction is to be made in the amount of reparations to be paid by Germany, the net effect of this change will be to transfer the burden of reparation payments from the shoulders of the German taxpayer to those of the American taxpayer.

Finally, the joint faculties of Columbia and Princeton urge the American people to reconsider the debt settlements with allied countries “because of the growing odium with which this country is coming to be regarded by our European associates”. I doubt whether European nations dislike us as much as some people tell us they do. But I know this, that if they do, the cancellation of that part of their debts which has not already been cancelled will not of itself change their dislike into affection. Neither in international relations any more than in private life is affection a purchasable commodity, while my observation and reading of history lead me to conclude that a nation is hardly likely to deserve and maintain the respect of other nations by sacrificing its own just claims.

No one can insure the future; but given normal conditions, it is believed a true balance has been held between the duty of the Debt Commission to the American taxpayer and fairness towards those nations to which was extended aid during and after the war. The debts have not been cancelled, but excessive demands have not been made. Certainly, the debt settlement cannot become too heavy a load in the next few years. In the future, with peace and the development of trade internally and externally, it is not too much to expect that this will be equally true of the later years also. The outstanding fact is that these debts have been settled. A fair trial can now be had, not on theory, but in practice, and a reopening of the whole question at the present time would do more to interrupt the steady progress achieved since settlement than might be gained from any ultimate minor adjustments that can be effected.

Very sincerely yours,

A. W. Mellon
  1. Neither printed.
  2. Signed Apr. 29, 1926; for text, see Combained Annual Reports of the World War Foreign Debt Commission, 1922-1926 (Washington, Government Printing Office, 1927), p. 257.
  3. Signed Aug. 18, 1925; ibid., p. 171.
  4. Signed Nov. 14, 1925; ibid., p. 222.
  5. Signed May 3, 1926; ibid., p. 280.